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Asset Pricing with a Reference Level of Consumption: New Evidence from the Cross-Section of Stock Returns

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  • Schrimpf, Andreas
  • Grammig, Joachim G.

Abstract

This paper presents an empirical evaluation of recently proposed asset pricing models which extend the standard preference specification by a reference level of consumption. We motivate an alternative model that accounts for the return on human capital as a determinant of the reference level. Our analysis is based on a broad cross-section of test assets which provides a level playing field for a comparison to established benchmark models. The human capital extended reference level model does a good job in explaining size and value premia. Estimated on Fama and French's size and book-to-market sorted portfolios it outperforms Lettau and Ludvigson's scaled CCAPM and delivers average pricing errors comparable to the Fama-French three-factor model.

Suggested Citation

  • Schrimpf, Andreas & Grammig, Joachim G., 2007. "Asset Pricing with a Reference Level of Consumption: New Evidence from the Cross-Section of Stock Returns," ZEW Discussion Papers 06-032 [rev.], ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:7189
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    More about this item

    Keywords

    Consumption-Based Asset Pricing; Cross-Section of Stock Returns; Reference Level;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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